Highlights
A build in inventories overstates strength in what is an otherwise a mildly firm ISM manufacturing report for June. The headline composite of 55.3 is two points higher than May but inventories, one of five equally weighted components, jumped more than five points to 54.1. This reading could indicate restocking tied to prior Japanese supply shortages but it probably doesn't indicate fundamental improvement in demand. Order readings offer the best gauge on that and they're soft, with new orders showing only slight month-to-month acceleration at 51.6 vs May's 51.0 but backlog orders show a slight monthly contraction at 49.0 vs 50.5 in May. Export orders, though still growing, slowed in the month to 53.5 for a point-and-a-half dip.

Employment is a big positive in the report, rising nearly two points to a very strong 59.9. Input price pressure is severe but easing while production is steady and firm at 54.5.

This report is mostly positive but is skewed higher again by inventories which is confirmed by big improvement in respondents' assessments of their customer inventories which they say are much less low than they were. Money is moving toward risk in reaction to the report.

Recent History Of This Indicator
The composite index from the ISM manufacturing survey in May dropped 6.9 points to 53.5. Near-term forward momentum eased as new orders slowed a very significant 10.7 points to 51.0, but remained over 50 to indicate growth compared to April (though slower growth). The export orders index slipped to 55.0 from 62.0 in April but remained moderately positive. A key issue is whether recent slowing was related to disruptions of supplies from Japan and any related softness could continue in the short term.

Definition
The ISM manufacturing composite index is a diffusion index calculated from five of the eleven sub-components of a monthly survey of purchasing managers at roughly 300 manufacturing firms nationwide. The survey queries purchasing managers about the general direction of production, new orders, order backlogs, their own inventories, customer inventories, employment, supplier deliveries, exports, imports, and prices. The five components of the composite index are new orders, production, employment, supplier deliveries, and inventories (their own, not customer inventories). The five components are equally weighted. The questions are qualitative rather than quantitative; that is, they ask about the general direction rather than the specific level of activity. Each question is transformed into a diffusion index which is calculated by adding the percentage of positive responses to one-half of the unchanged responses.
Why Investors Care

The ISM manufacturing index (formerly known as the NAPM Survey) is constructed so that any level at 50 or above signifies growth in the manufacturing sector. A level above 43 or so, but below 50, indicates that the U.S. economy is still growing even though the manufacturing sector is contracting. Any level below 43 indicates that the economy is in recession.Data Source: Haver Analytics